Ask Gen Y Planning: Should I Be a Socially Responsible Investor?

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I would like to learn more about the pros and cons of socially responsible investing (e.g. VFTSX fund instead of VTSAX). What are the criteria used for picking stocks in funds like that?

Socially responsible investing has become a very popular investment strategy, especially in the past decade. For this, you can thank millennials (we’re good for more than just killing cereal, napkins, and bar soap!).

So what is socially responsible investing (SRI)?

It’s a strategy where you put your dollars toward investments that result in both a positive social or environmental change for the world, and a positive financial gain for you. A good example of this would be a mutual fund or exchange-traded fund (ETF) that avoids companies involved in the production of alcohol or tobacco, or companies involved in the production of firearms.

Another form of socially responsible investing is when multiple investors pool assets to provide loans to community businesses and start-ups, as we see being done through companies such asCNote.

Sounds great! So what’s the catch?

Originally, SRI began as a fringe investment strategy. SRI funds tended to have higher expense ratios than index funds because of the level of detailed analysis that fund managers would have to undertake in order to screen and select companies. Many of these managed mutual funds were underperforming similar index funds resulting in lower returns.

As a result, one investment strategy is to select index funds with traditional investment philosophies, and donate money to socially responsible companies and charities to make a direct impact on the organizations you believe in rather than trying to avoid the ones you don’t.

Millennials are interested in impact investing

More and more people wanted to be able to invest in (not just donate to) socially responsible companies that provide a competitive return, without having to pay a ton of fees for the privilege. According to Bloomberg, about 84% of millennials are interested in socially responsible investing, and this is not something that is expected to change anytime soon. The number of socially responsible mutual funds and ETFs has nearly doubled from 2012 to 2016, with new funds coming to market frequently.

Fund performance is improving and fees are going down

According a study published by the Harvard Business Review, firms that make investments in environmental, social, and governance (ESG) issues relevant to their businesses experience better stock market performance and profitability.

You specifically asked about the Vanguard FTSE Social Index Fund (VFTSX) vs. Vanguard Total Stock Market Index (VTSAX). The SRI fund (VFTSX) returned 9.92% in the last decade whereas VTSAX returned 9.74%, giving the slight edge to the socially responsible fund. However, keep in mind that past performance doesn’t predict future performance!

It’s important to do your research into companies you plan to invest in. “Socially responsible” can mean different things to different companies and they are not all created equal. There are a number of companies with effective philanthropic initiatives that may produce products you don’t agree with. Ultimately, where you invest your money is a personal decision that you make based on your financial goals and your personal values.

I'm Sophia! And I'm not your father's financial planner. I work virtually with clients across the country to help them navigate through big life changes and reach their goals. I'm also a foodie, a true crime junkie, and a lover of karaoke. Let's chat! Click here >>